In Indian stock market, everyone wants to make money, not Indian specifically, everyone in equity market across the world, would like to make money, but the real question is, are people making money? I think yes,
Few days back one of my friends had discussed with me, he is buying stocks because, there are bonus announcement by company, de merger of the company and he is getting few shares of the de merged entity. I am not against any corporate activity, but remember corporate activity helps when you are long term holder in the company, and you buy that stock way below at cheap prices. Just for the corporate activity is announce and you are rushing for buying those stocks, I think it’s not at all investing, it a part of speculation.
Why people have this kind of confidence in buying stocks, because they ignore the risk, they don’t know the financial disaster, they had not face any bear market, my friend is a clear product of bull market, which is just started in India.
I find few reasons and few insights about this kind of behavior. There are more psychological influences in the mind of investors.
The desire for more, the fear of missing opportunity, comparing yourself to others, the influence of media, news and crowd, these are common human tendencies all this have impact on investors and most markets. It is very true when markets at extremes and the ultimate result is mistakes and looses.
Envy : The basic nature of any investor is that they strive for more and more the impact is even stronger when they compare themselves to others, this is one of the harmful and dangerous situation, my friend says me one of his friend has making money in trading and he left the job, he is getting dividend income, and he trades on dividend. Is this the part of investing, I am not against anybody, the question is what people are showing is this realty, or he is successful in trading, how you can think you will become successful trader, it’s a clear demarcation of envy.
If you would like to overcome, and want to be good happy investor, isolate yourself from others, investors become miserable when they see others do better, In investing and in life also, it’s very hard to sit by and watch while others make money than they do or become more successful then you.
Ego : Ego one of the great subject in life, and it’s very challenging to overcome it. When things go right, it’s fun to feel smart and have others agree, which is the main cause of becoming egoistic, in investing if you are making money and your investing become right, and all other your circle become agree with you, your ego will grow, and if you are not able to stop there you are end up with lot of disappointments.
Great investor achieving solid gains in good years, and losing less than others in the bad, they avoid unnecessary investment, because they don’t know about the company and its out of their circle of competence, they admit it, why because they have their egos in check, and this is the greatest formula for long term wealth creation, but it will not that glamorous.
Capitulation : It’s a phenomenon, I read it in Howard Marks book “The most important thing” highly recommended to every investor to read it in recent market environment. “The phenomenon says a regular feature of investor behavior late in cycles. Investors hold to their convictions as long as they can, but when the economic and psychological pressures become irresistible, they surrender and jump on the bandwagon”.
In general people who starts investing, open their dmat account, lot of investors know what to do, what is better for themselves, they remain in their circle of competence, they know buy when prices are low and sell when prices are high.
But then psychology and crowd, media, news, friends influences to take action. This kind of psychology moves assets prices in both the direction, this type of market conditions make very intense affect on investor psyches.
Greed, excitement, illogicality, disbelief and ignoring the value of assets, and only focus on price and its movements cost people a lot of money, and brilliant, disciplined value investor looked dumb in extreme bull markets. To overcome this, don’t join the same minded people party and don’t do what the crowd is doing, isolate yourself.
As per Howard Marks “It’s not easy” It’s very hard to control your temptation and resist yourself buying at the top.
There is no clear cut formula that will tell you when the market has gone to an irrational extreme, no tools, no computer program, will protect you. Only your behavior can save you. Few things like, value buying, don’t act when prices are extremes, your experience, and your psychological understanding can save your monetary loses.
Contra calls can be a best weapon in all market conditions, when others are selling go and buy and when others are buying and market making new high sell your holding. If everyone believe it’s a best investment to buy, don’t go and buy might have underlying assets has good potential, because everyone knows it’s a good investment, there is no logic and limited potential to give return.
Remember, large amount of money are not made by buying what everybody likes, large amount of money are made by buying everybody underestimates. See some quality that others don’t see. If you follow the herd will give you average performance in the long run, and ultimately it kills you at the extremes.
The recent example from Indian Stock Market
News anchors and all pundits says a classical phrase “Don’t try to catch the falling knife” All around the negative NEWS, and recent one is BREXIT. All news channels showing full coverage on BREXIT, I don’t find any rational behind all the BREXIT news,
The classical case of Rolf Dobelli book “The art of thinking clearly” has a best example.
Take the following event. A car drives over a bridge, and the bridge collapses. What does the news media focus on? On the car. On the person in the car. Where he came from. Where he planned to go. How he experienced the crash (if he survived). What kind of person he is (was). But – that is all completely irrelevant. What’s relevant? The structural stability of the bridge. That’s the underlying risk that has been lurking and could lurk in other bridges. That is the lesson to be learned from this event.
And I think BREXIT is the classical case like bridge.
Whole lot of uncertainty and analysts are saying wait until the dust settles, what they mean they afraid of buying or don’t know what to do. The bargains are available in uncertainty and dust, when everything is settles no bargain available that time.
Your job is to find contrarians and catch falling knifes and you must hold the compass in your hand when dust is around, because you don’t know the direction, and the compass will give you the direction. Lets see what is compass,
Compass, is your analysis about company, your psychology and your behavior in hard times.
It’s very simple, but it’s not easy, it require “second level thinking” as per Howard Marks.
To Your Success with Lot of Love!
Harish S Kawalkar
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